India’s recent claim of creating 17 crore jobs over the past decade marks milestone. However, the challenge ahead is deeper. India aims to become a $36 trillion economy by 2047. Achieving this requires addressing the vast productivity gap between formal and informal sectors. Formal workers generate far higher value than informal ones. Closing this gap is vital for inclusive growth and economic transformation.
The Productivity Divide Between Formal and Informal Sectors
Formal industrial workers produce an annual Gross Value Added (GVA) of about ₹12 lakh. Informal workers generate only around ₹1.5 lakh per year. This eightfold difference shows stark inequality in productivity. Nearly 91% of India’s workforce is informal, while only 9% is formally employed. This imbalance drags down national income growth and economic inclusion.
Wages and Productivity – The Missing Link
Economic theory suggests wages should match productivity. But in India, excess labour supply and underemployment distort this link. Large informal and agricultural sectors keep wages low despite rising productivity in formal jobs. About 42% of workers are in agriculture, contributing just 18% to GDP. This signals disguised unemployment and weak wage-productivity correlation.
Formalisation as a Policy Priority
Formalising the workforce is crucial for raising productivity and wages. Formal jobs offer social security, stable contracts, and skill development opportunities. Schemes like e-Shram, ESIC, and EPFO need universal reach. Small businesses and gig workers require incentives to adopt formal contracts. A Formalisation Index can track progress and show bottlenecks.
Addressing the Skills Deficit
Only 4.7% of India’s workforce is formally skilled, far below developed countries. This gap limits access to high-productivity roles in manufacturing and services. Expanding National Skill Development Corporation and Industrial Training Institutes is essential. Curricula must evolve to include digital, AI, and green technologies. Industry-academia collaboration will ensure relevant training and job readiness.
Innovating Wage Structures to Reflect Productivity
Linking wages to performance can incentivise productivity. Sectors like electronics and textiles can adopt output-based pay models. Even public schemes like MGNREGS could introduce performance bonuses without compromising worker rights. Digital tools like AI and IoT can objectively measure productivity. Platforms such as ASEEM and DigiLocker can track worker skills and wage history.
Harnessing the Demographic Dividend
India’s young workforce is a major asset. But without formalisation and higher productivity, this advantage could become a liability. Growth without wage increases fuels inequality and unrest. Inclusive growth demands raising worker productivity and ensuring fair wage share. This requires investment, reforms, and political resolve.
Questions for UPSC:
- Point out the causes and consequences of disguised unemployment in India’s agricultural sector.
- Underline the role of skill development in enhancing labour productivity and economic growth in developing countries.
- Critically analyse the challenges and benefits of formalising the informal labour sector with suitable examples.
- Estimate the impact of demographic dividend on India’s economic development and discuss strategies to maximise its benefits.
